Social Security update for 2013

It has been my custom for most of the past 15 years to write a year-end column that summarizes the Social Security changes and updates scheduled to take place the following year.

Almost all Social Security beneficiaries are familiar with the most popular and publicized upcoming change: the increase in monthly benefit checks for 2013 due to the automated cost-of-living adjustment, or COLA. In fact, Social Security recipients have probably already received a notice from the Social Security Administration telling them of the expected increase.

All Social Security checks are going up 1.7 percent in 2013. The COLA is based on something called the Consumer Price Index for Urban Wage Earners and Clerical Workers. This is the official measuring stick SSA has used to determine COLAs for the past 40 years. If you want to learn more about this measure, check out the website of the folks who maintain it: the Bureau of Labor Statistics. You'll find them at www.bls.gov.

I always dread mentioning COLAs in this column because every single time I do, I am flooded with emails from readers complaining that the increase is not enough. (Curiously, not once in 15 years has anyone ever written to me to say that their COLA increase was too high!)

Yet here's the rub: many economists and social planners believe Social Security COLAs are too generous! (I've explained why in past columns, but don't have the space to get into that argument today.) That's why most discussions of long range reforms for Social Security include proposals to reduce cost of living increases.

Due to these increases, the average monthly retirement check will be $1,261 in 2013, a $21 increase from the 2012 level. The maximum Social Security check for a worker retiring at age 66 next year will be $2,533, compared to $2,513 in 2012. And please note that is the maximum for someone turning 66 next year. That does not mean it is the maximum Social Security payment anyone can receive. There are millions of Social Security beneficiaries who get much more than that, primarily because they work well past age 66.

Another measuring stick, called the national wage index, is used to set increases to other provisions of the law that impact Social Security beneficiaries and taxpayers. Specifically, this includes increases in the amount of wages or self-employment income subject to Social Security tax; the amount of income needed to earn a "quarter of coverage;" and the Social Security earnings penalty limits.

The Social Security taxable earnings base will go up from $110,100 this year to $113,700 in 2013. In other words, anyone who earns more than $113,700 next year will no longer have Social Security payroll taxes deducted from their paychecks once they hit that threshold. This has always been a very controversial provision of the law. (Donald Trump pays the same amount of Social Security tax as his plumber.) I will bet a year's worth of my pension checks that any Social Security reform package will include a big increase in that wage base. I don't think it will be eliminated. But it will increase rather sharply.

Most people need 40 Social Security work credits (sometimes called "quarters of coverage") to be eligible for monthly benefit checks from the system. In 2012, people who were working earned one credit for each $1,130 in Social Security taxable income. But no one earns more than four credits per year. In other words, once you made $4,520, your Social Security record has been credited with the maximum four credits or quarters of coverage. Next year, the one credit limit goes up to $1,160, meaning you will have to earn $4,640 in 2013 before you get the maximum four credits assigned to your Social Security account.

People under age 66 who get Social Security retirement or survivor's benefits but who are still working, are subject to limits in the amount of money they can earn and still receive all their Social Security checks. That limit was $14,640 this year and will be $15,120 in 2013. For every two dollars a person earns over those limits, one dollar is withheld from their monthly benefits.

There is a higher earnings threshold in the year a person turns 66 that applies from the beginning of the year until the month the person turns 66. (The income penalty goes away once a person reaches that "full retirement age.") That threshold goes up from $38,880 in 2012 to $40,080 next year.

A couple other Social Security provisions are also impacted by inflationary increases. For example, people getting disability benefits who try to work can generally continue getting those benefits as long as they are not working at a "substantial" level. In 2012, the law defined substantial work as any job paying $1,010 or more per month. Next year, that substantial earnings level increases to $1,040 monthly.

Finally, the Supplemental Security Income basic federal payment level for one person goes up from $698 this year to $710 in 2013. SSI is a federal welfare program administered by SSA, but it is NOT a Social Security benefit.